"The Fundamentals Are Sound"… Or Are They?

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Ned K.

According to the Reserve Bank of New Zealand in its September 2016 report, New Zealand's economy is facing severe financial instability due to the banks being "heavily exposed to housing, with mortgages making up around 55% of their total assets. Household debt, at 163% of household disposable income, is at a record level" (Australian Financial Review 30 Sept 2016). 

In Australia, household debt to disposable income ratio is greater than 180% and the share of the banks' exposure in mortgages is 62%, higher than in New Zealand.

While big business economists from organisations like CommSec and AMP Capital think the "fundamentals are sound", some noted economists do not share their optimism. For example, economist Steven Keen sees the household debt levels and the associated property market "bubble" as unsustainable. He anticipates the bubble will burst within three years.

When asked by the Australian Financial Review whether for example Sydney was in a "bubble” he replied, "Absolutely, it is in the most obvious bubble on the planet apart from China and Canada. What bursts high price bubbles is not the level of debt but the change in debt. At this rate we will have an infinite debt to income ratio. We will reach 170% of GDP and the highest the world has ever seen is 140%"

Keen added that Australia is already emulating the US subprime crisis of 2007.

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